The Pot Industry Puts on a Tie

As Marijuana Becomes Legal, Businesses Look for Managers Who Know the Ropes

Creating a corporate culture can be a balancing act under the best of circumstances. Then, there is the marijuana industry, once dominated by networks of outlaws but now dotted with publicly traded companies with chief financial officers and investor relations.

"It's a black market legitimizing itself, not a new market growing from zero," says Robert Kane, chief financial officer at Cannabis Science Inc., which develops "cannabinoid-based therapies" in Colorado Springs, Colo. "There is that element of criminality. There are companies in the industry that used to be smugglers of cannabis," he says. Some people making that transition from criminal to legitimate, he says, have the mindset of "'I used to smuggle $50 million worth of cannabis—that makes me a competent business leader.' It does not."

Since 2000, more than half the states in the country have liberalized their marijuana laws, allowing medical marijuana use, decriminalizing the drug, or, in the case of Colorado and Washington, legalizing recreational use, according to the National Alliance for Model State Drug Laws, a congressionally funded group that generates draft statutes on drug policy.

MarijuanaIndex.org lists more than 40 publicly traded companies in the industry, with a combined market capitalization of over $4 billion.

The industry's new business focus is remarkable to Mr. Kane, who has helped marijuana companies develop business plans. He recalled asking a president of a marijuana company in California, "Who does your investor relations?" The reply: "What's investor relations?"

Yet last month, about 1,200 "mostly suit-and-tie clad folks" seeking answers to questions like that attended the Cannabis Business Summit in Denver, according to Aaron Smith, executive director at National Cannabis Industry Association, which hosted the event. Presentations included, "Protecting Your Investment: Risk Management and Insurance for the Cannabis Industry," "Money Matters: The Banking Crisis and How to Survive in a Cash-Only World" and "Paying Your (Un)Fair Share: The IRS, 280E, and Keeping Your Business Tax-Compliant."

In another indication of how the industry is becoming more established, former New Mexico Gov. Gary Johnson this month became chief executive at Cannabis Sativa Inc., a Nevada medical-marijuana research company. A recently acquired subsidiary has filed for a U.S. patent related to a specific strain of the drug.

While he didn't attend the Cannabis Business Summit in Denver, he is dealing with the questions that arise from a business that can operate some places but not everywhere.

"You can't cross state lines with any of these products," Mr. Johnson says. "That's not encouraging research and development and innovation."

Disregard for the demands of being a public company is still a problem. The Securities and Exchange Commission suspended trading of five marijuana-related companies earlier this year. The agency busted two for possible "unlawful sales of securities and market manipulation." In a May 16 alert, it reminded would-be investors that companies in the industry "may be at risk of federal, and perhaps state, criminal prosecution."

The constant threat of federal prosecution can make it difficult to create a professional business culture. "When everything's established we'll get more solid people [in the industry]," says Chet Billingsley, chief executive officer of Mentor Capital Inc. in Ramona, Calif., a firm that invests in medical and recreational marijuana companies.

As the Office of National Drug Control Policy reminds on its website: "state marijuana laws do not change the fact that using marijuana continues to be an offense under Federal law."

That influences corporate behavior, says Stephen Shearin, chief operating officer of
American Green Inc.,
an Arizona company that has developed a marijuana vending machine. For now, some companies in the industry aim to conduct business but keep a low profile at the same time. "Everybody…kind of walks on eggshells—'let's just be cool and not say too much,'" he says.

Nonetheless, Mr. Shearin's company is expanding and focused on hiring people with a professional work ethic—which means trying to attract a talent pool that defies the pot-head stereotype of laid-back nonchalance. "You need somebody...[who] understands that you've got to have a 9:30 a.m. sales call," he said, "and you've got to have some kind of accountability."

Mr. Shearin said he cannot identify employees in his company who smoke marijuana. But, he said, "I can tell...the people who definitely don't."

Rapid Fire Marketing Inc.,
which sells the Cannacig, an e-cigarette "vaporizer" that can be used with oil from marijuana, has struggled to find the right people to perform executive functions, says CEO Thomas Allinder.

"We have had issues pretty much straight across the board with respect to that," he says.Some CFOs, attorneys, and accounting firms "will absolutely not work with a company that can be anywhere near possibly construed as working in the medical marijuana industry," Mr. Allinder says.

Referring to the CEO he replaced in 2012, he says, "I just had more business experience than he did."

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